Commentary on how China and the world are adapting to each other -- or not.

August 15, 2013

China's corporate landscape is continuing to evolve in ways unexpected and expected. I recently came across what looks like same very boring data on the number of companies and their registered capital from the State Administration of Industry and Commerce. The data from 2013 is fascinating, but even more cool is what happens when you compare it to the same data from 10 years ago.

First, the 2013 data, summarized in the table below.

I draw a few conclusions from this data. Just in terms of the numbers of companies, the private sector dominates the scene. There are 11.6 million private firms (私营企业) and over 42 million smaller individual proprietorships (个体户). China has lots of SOEs, but far more private firms.

However, SOEs have a far larger combined amount of capital than private firms. Although only 4.1% of firms are SOEs, SOEs account for 46.6% of registered capital. This translates into very different average firm size, with SOEs being larger than private companies by a factor of 6. SOEs still tower over private companies literally and figuratively.

Finally, there are a large number of foreign-invested firms in China, over 440,000 at last count. It is possible that a significant chunk of these are Mainland Chinese firms who have registered in Hong Kong and then re-invested back in the Mainland in order to receive special benefits, but my guess is the proportion of firms using this trick is declining as the advantages of being an MNC in China drop. In any case, the average MNC in China has over RMB 27 million in registered capital, 50% more than SOEs and 9 times more than the average private firm. Think Walmart vs. the local grocer, Hilton vs. Home Away Motels.

When the corporate landscape is viewed over time, though, things take on a different look.

Over the last decade the number of SOEs has been cut in half,while the number of private firms has increased over three-fold, the number of propreitorships and foreign-invested firms have almost doubled.

When you look at registered capital, the story shows a smilar pattern of change in the direction of the private sector.

SOEs' share of total registered capital has fallen from 62.3% to 46.6%, while that for private firms has risen from 14.9% to 38.0%. If you include smaller proprietorships, the private sector now accounts for over 40% of all registered capital, just under the amount for SOEs. At the same time, the share belonging to MNCs has dropped, from 21% to 13%. MNCs are on average much larger than private companies, or even SOEs, but their share of overall registered capital is dwindling.

The next conclusion that jumps out at me as that although SOEs' share of the overall registered capital has dropped, their average size, measured by capital, has jumped six-fold, while the increase for others has been more modest. Many SOEs have died off, but those that remain are on average larger and more powerful. They are hard to be displaced by their competitors.

In sum, the private sector is growing, in absolute and relative terms, while SOEs are shrinking in numbers of companies but growing in terms of average size. And multinationals are on average large, but their relative significance in the economy is dropping.

How do trends in economic capital translate into policy or political capital? Beijing is clearly trying to protect SOEs and their role in certain segments of the economy, particularly strategic sectors. At the same time, the private sector is gradually being allowed to expand its footprint across regions and in previously blocked sectors, and we can expect such policies to be gradually widened still further.

And finally, the situation for MNCs is clearly changing. They constitute a smaller share of registered capital than in the past. This may explain why special privileges they enjoyed have been eroded. From another perspective. It could also help explain why they appear to be under attack more from the bureaucracy and the media. There are now domestic competitors ready to take their place in just about every area of the economy. Regardless of whether the changing status of MNCs is fair or not, if economic capital translates into political capital, we shouldn't expect their treatment, relative to SOEs and private companies, to substantially improve.

Of course, that assumes a straightforward correlation between economic and political capital. Since I'm no Marxist, I know that is not entirely accurate. (I'm a liberal, so I know there is some truth to this.) MNCs are well organized, are represented by powerful governments, and have a large swath of global media in their corner. So despite all the problems they are facing, no one should count them out by any means. MNCs are in China to stay.

February 26, 2013

China's Internet has never been an easy place to drive. Although theoretically a super-highway paved with thousands of kilometers of fiber optic lanes, the Internet is more like a highway with a toll booth at every mile. Data is scanned repeatedly and often. In techno-speak, the speed is high, but there is also high latency. That's why even when some enterprising souls turn on their VPN's as a way to get around the Great Fire Wall, their performance goes up -- the broadband speed declines but most of that latency (sitting around at toll booths) disappears.

Things have gotten even worse since last Fall, most likely as a result of the 18th Party Congress. Not only are certain individual websites less accessible, in general it's felt as if another layer of filtering and security was added, molasses poured on top of glue. This has been the informal feeling of friends across China, north and south, off and on campuses, Chinese and foreign.

Today is the first day I'm wondering if things have changed. Why? Because Skype today worked crystal clear for first time since I can remember. A clear video-to-video chat between China and the US, without VPN, over WiFi, with essentially no problems, save for my kids bouncing around the room not holding the camera steady. We could all see and hear each other clear as a bell with no static or delay.

I looked outside, the sky was still a semi-clear, semi-milk white haze (PM 2.5 reading still way up there). A few minutes later I got into a cab, and traffic still was snarled, and the drivers still darted left and right without warning. Pedestrians still hocked loogies on to the street. Bushes were still covered with dust, and tree branches still were naked. And the ground was still as dry as a desert - because yes, we are, in fact, living on top of a desert hidden by a city of 20 million.

Yet I still have a ray of hope that something positive happened today.

January 17, 2013

How can government-business relations be structured to most likely generate good economic policies? A huge question with perhaps no good answer. In the late fall I gave an interview to a reporter from the China Enterprise News (CEN) on this question. My answer, published a couple days ago, borrowed from Peter Evans' 1995 book, Embedded Autonomy. In a nutshell, businesses need to have access to government to collect information and provide ideas, but at the same time not be too closely enmeshed with their regulators and politicians.

CEN was kind of enough to publish an extensive transcript of the interview in which I compared governmen-business relations in the United States and China. America certainly has huge problems with powerful lobbyists, but more and more Chinese I meet are confounded by the increasingly unbreakable ties that bind business and the state in China. And it's not just SOEs. Private companies, in order to survive economically have had to come to terms with the system politically. In most cases, they now go along to get along. China appears to be moving further and further away from the reasonable ideal that Peter Evans described.

November 15, 2012

Today's unveiling of the new Chinese leadership reveals a system that generates balances, however, fragile, involving factions, policies, and process.

We tend to over-emphasize the significance of personal factions and princelings, since neither tells us much about the policy preferences of individuals or the likely policy direction of the leadership overall. But to the extent that we do, there is factional balance in this group. Jiang Zemin apparently was able to insert more allies in positions on the Politburo Standing Committee (PBSC) than Hu Jintao, but Hu's man, Li Keqiang is #2, a spot higher than usual for Premier, and ahead of supposed Jiang ally, Zhang Dejiang. But the wider Politburo has several folks who served in the Communist Youth League or are from Anhui and could be considered allies of Hu, most importantly, Hu Chunhua (Party secretary of Inner Mongolia) and Wang Yang (Party secretary of Guangdong). And some have worked closely with both Jiang and Hu, such as Wang Huning, who was originally brought to Party center by Jiang, but has served as head of Party's policy research office under Hu. And although Xi is surrounded by supposed Jiang and Hu accolytes, he is the top dog, and he immediately got Hu's seat as Chair of the Central Military Commission. Hu looks like the loser, but it wasn't a blow-out.

Whatever we think about any one individual or factional ties, we are seeing some interesting broad trends in the group. The average age of Poliburo members is unchanged, but the trend of growing diversity in educational backgrounds has continued. Engineering technocrats no longer dominate the body. Even majoring in Chinese literature isn't an obstacle to getting to the top.

Some of the disappointment I've heard about the new group is that the two most likely advocates of serious political reform, Li Yuanchao and Wang Yang, didn't make it to the PBSC. But you'd have to beyond optimistic to believe the CPC top leadership is at all serious about democratization. That is not in the cards no matter who is in the PB. There's not a Gorbachev among them. We'll see a range of reforms to improve how this system works (budget transparency, income reporting, more efforts to rein in corruption), but all of these tactics are being done to make this system work better, not prepare China to move toward another (multi-party democratic) one. If you're skeptical they can make this system work better, they're going to try and prove everyone wrong. Either they'll succeed, or there will be a political meltdown.

There has been some talk about "institutionalization" of the succession process and elite politics. Yes, if this means efforts to secretly negotiate an outcome minimally acceptable to all powerbrokers, and forcing anyone 68 or older into official retirement. But beyond that, things appear much more fluid. Bo Xilai was brought down with a sledge hammer for apparently covering up a murder and being corrupt, and it is certainly possible opponents of Wen used the foreign media (NYT) to tar him for having a wealthy family. Negotiations were not neat and orderly and appear to have lasted through October. And many of the final decisions are inconsistent with recent practice: 1) The PBSC went from 9 to 7 members; 2) The premier's rank was raised from #3 to #2 in the Party hierarchy; 3) Xi assumed the Central Military Commission chair immediately rather than at a future plenum a year or two later (as Jiang and Hu did in 1994 and 2004); and 4) The number of women on the Politburo rose from 1 to 2, a positive but unprecendented development.

I suppose someone could say all of this is consistent with "flexible" institutionalization, but that would be an excellent example of "conceptual stretching."

Despite the Party's likely continued tight control on the political wheel and the lack of institutionalization, I expect more balance between encouraging market mechanisms and industrial policy. We should see sustained, though incremental economic reforms, which would be an expansion of trends begun over the past year: liberalization of interest rates, continued bond market and stock market reforms, gradually opening the capital account, loosening prices for commodities and energy, and reducing monopolies for SOEs. At the same time, we should be under no illusion that industrial policy's days are numbered. To the contrary, we will continue to see extensive intervention in most areas of the economy, particularly for "strategic emerging industries (SEI), particularly for SEIs, as the government is not about to have faith that the market alone will push firms to invest in R&D and focus on moving up value-added chains.

Most refreshing, though far from Obama-like, is Xi Jinping's style. When he addressed the media, he spoke in non-Marxist terms about how he views the country and what his goals are. He made zero reference to his predecessors -- Mao Hua, Deng, Jiang, or Hu, and he only mentioned "Socialism with Chinese Characteristics" once. There was even some varying intonation in his voice, and he had a genuine smile. Goodbye Robot Hu!

November 07, 2012

The winds are blowing West, and this is good for US-China relations and addressing global problems.

Why am I more than cautiously optimistic?

The "feeling out" period often associated with new administrations will be much shorter and less bumpy than had Romney prevailed. Secretary Clinton and perhaps some other cabinet secretaries will likely step down in the Spring, but there should be substantial continuity in personnel. More change will come on the Chinese side, but most of the new leaders have already been on the scene and engaged with the US and international affairs for some time. The main adjustments will be adapting to Xi Jinping's style and the new slate of members on the Central Military Commission.

The victory allows Obama to carry out his domestic policies with renewed vigor. Although Obama did not win a clear policy mandate, and the House of Representatives is still in Republican hands, he and the Democrats performed impressively. The economic recovery is likely to continue and improve, and the US's long-term demographic transition is likely to benefit the Democratic Party. There will be tremendous pressure on the Republican Party to give up its strategy of opposing Obama at every turn. Hence, we should see a rollback of the Bush tax cuts, full implementation of Obamacare, and greater attention to US industrial competitiveness.

Obama's policies toward China and East Asia will continue along the same trajectory developed over the past few years. Aside from token criticism of Obama's weakness vis-a-vis the Chinese curency, Romney and the Republicans had very limited critiques of Obama's foreign policy (see the second debate). The 60-plus official bilateral fora for dialogue and cooperation will continue. At the same time, the US will proceed with using the WTO and bilateral antidumping and counterveiling duty investigations as a way to push Chinese economic policies to be less harmful to US business interests. Efforts to adopt a Trans-Pacific Partnership will continue apace and perhaps with a greater PR campaign. The US will continue to highlight the importance of freedom of transit and the peaceful solution of territorial disputes in the South China Sea and expand cooperation with countries on China's periphery. And without the specter of another election, Obama may be more willing to engage multilaterally for a mini-Doha package and a substantive deal on climate change through the UN process.

China could be on the defensive for the next few years. In early 2009, because of the global financial crisis, Obama began his presidency in a weakened position, and China's star seemed to be rising quickly. Now things look different. It is the US that is resurgent, and there are serious concerns about China's economy, in the short term due to substantial growth in debt, and in the medium/long term due to the difficulties of shifting toward a more efficient economic growth model. Although there are understandable concerns about a flair-up with Japan, I don't expect China to assume a nationalistic defensive crouch during this period. That is because the likely new Politburo Standing Committee will be relatively reformist in character, closer in temperment to the group in power in the 1990's (not surprisingly, Jiang Zemin has had a big hand in shaping the incoming group). I expect the new Chinese administration to adopt policies that help China gradually overcome many of its economic challenges (although I don't see democratic reform on the horizon). In the near term, these problems may be serious enough to constrain China's assertiveness.

In March 2012, Kenneth Lieberthal and Wang Jisi issued an important report highlighting the strategic distrust that has seeped into the relationship. I do not see that distrust dissapating easily and replaced by a straightfoward, uanbashed partnership. However, I do think the continuity of leadership on the US side, the potential greater US confidence domestically and internationally, combined with serious challenges in a China headed by a more reformist leadership may create an environment for greater cooperation. The US may be more ready to compromise on some aspects of the Doha Round and climate change, and China may need a more stable periphery and explicit support in a way it hasn't shown of late.

Thus, in multiple ways, there is a chance to re-live the 1990's all over again, but this time get it right. When the Clinton Administration came into office, the US had vanquished the Soviets and Iraq. It took over a year for the president to drop the "Butchers of Beijing" rhetoric and extend MFN to China without condition. The relationship improved somewhat, but was still hit by the Taiwan Straits crisis and the mistaken bombing of the Chinese embassy in Belgrade.

More broadly, although the Clinton Administration got the US economy rolling again (or at least supported trends eminating from Silicon Valley and elsewhere), signed NAFTA, and got the WTO launched, more could have been done in terms of addressing climate change, limiting nuclear proliferation, enhancing mechanisms of cooperative security, and adopting policies that really fostered economic development and state-building in developing countries. That agenda was cut short by the Bush victory in 2000 and 9/11. We can't erase those 8 years, but it's possible the Bush era could be seen as an interregnum, a pause taken to deal with immediate threats that pushed back addressing deep-seated, long-term global challenges.

And if China is entering a period where they recognize a new wave of domestic reform is needed, then we really could be back in a similar situation. Of course, we cannot unwind the 2000's -- the threat of Middle East terrorism, the damage to the US economy, and China's emergence -- but with Obama repeating Clinton's successful re-election bid, it does feel a little like 1996.

And if you listen, you can hear Celine Dion singing her hit of the year, "Because You Loved Me."

November 02, 2012

Conventional wisdom has it that we are unlikely to see a highly aggressive economic reform agenda adopted by the new leadership that comes to power in a couple weeks. One of the main reasons given is the lobbying power of state-owned enterprises (SOE). Commentators highlight the strong ties between the leadership and SOEs, for example, highlighting that Zhou Yongkang spent so much time at China National Petroleum Corp. that he is essentially the oil industry's advocate on the Politburo Standing Committee. And once he retires, he could be replaced on the Politburo by Su Shulin, formerly a general manager at Sinopec and now governor of Fujian.

Certainly these ties are not insignificant, but we ought not make too much of them. The trend, in fact, is a decline in direct ties between leaders and SOEs. I collected data on all of the Politburo members for the 15th Central Committee (1997-2002), 16th (2002-2007), and 17th (2007-2012), and then made my best guess on the likely composition of the upcoming Politburo. I then culled their bios for work experience in SOEs. The data are surprising:

The biggest reason for the decline in SOE experience is the larger number of Politburo members who have worked their entire careers in the Communist Party and government. This is particularly true for those who have worked their way up through the Communist Youth League. They, of course, owe their rise to Hu Jintao.

SOEs are not well represented anywhere in the official political system. Here is how things break down on the current National People's Congress, China's legislature:

SOEs are certainly over-represented relative to private companies, of which there are far more, but a 9% share of seats is quite small. The NPC is dominated by government and Communist Party officials, not SOE executives.

The Central Committee data show the same results. There are a very small number (less than 10) of SOE managers who are alternate members of the Central Committee, but none are regular members.

This situation may change, but those looking for SOE influence don't make that argument.

So where does SOE power likely come from?

1) The government's ownership and control of SOEs, which gives offiicaldom a stake in making sure SOEs do well. If the financial sector is liberalized and administrative monopolies shrunk, that will hurt SOEs.

2) The above data only focuses on officials themselves and not their family members. It is likely that just about every single member of the Politburo and Politburo Standing Committee has at least one family member who works in an SOE.

3) Even if officials don't overly care about SOEs or have family members in SOEs, it is likely they have friends and colleagues who work in SOEs. Officials are socialized to believe that SOEs are natural and important parts of China's social fabric, and they shouldn't be penalized.

4) SOE senior executives share the same administrative rank or have an even high rank than many of the bureaucrats who are supposed to regulate them. That makes SOEs difficult to control.

The above discussion shows reasons why we shouldn't overstate SOE influence but why we should expect them to still have significant power. My own view is that despite being highly influential in a variety of ways, if the leadership wants to institute substantial reforms that hurt SOE interests, they could, and they would not pay a steep political price for doing so. There are a variety of ways the leadership could manage this kind of opposition, including rotating or firing SOE managers, implementing changes gradually, and compensating SOEs with other kinds of benefits. The question is, does the leadership want to do this? We'll find out soon.

October 23, 2012

China featured prominently in the 2nd and 3rd US presidential debates, in fact, more in the 2nd than the 3rd, even though the latter was on foreign policy. Although there has been handringing in Beijing because President Obama and Governor Romney have emphasized the competitive nature of the relationship and the need to have China play by the rules, neither has given many specifics about policy going forward. Also, both have used essentially the same formulation, "We want to be partners if China plays by the rules." That is essentially consistent with the approach taken since the middle of the Clinton Administration.

The most detail we got from Romney is that, "On Day One I will label China a currency manipulator." That implies he will institute sanctions or penalties against China because the RMB is undervalued. Maybe, but not necessarily. There are several steps that have to occur between his declaration and sanctions, and none are automatic. So this moment of supposed policy precision is just another example of Romney being Romney. In fact, we have absolute zero idea what Romney's policies toward China -- or essentially anywhere in the world -- will be.

President Obama's position seems clearer. He'll continue his policies of the last 4 years, particularly since the administration adopted its "pivot" to Asia in 2010/11. Obama will continue to go to the WTO, since as he noted, the US has been so successfl there. By my count, it has won 9 of 10 cases against China in Geneva. He also was perhaps unexpectedly honest about the Trans-Pacific Partnerhsip (TPP). He did not mention these words last night, but when he said the US is organizing countriesi in the region to adopt an agreement on trade and investment principles that sets high standards and that should put additional pressure on China, he meant TPP. This framing gives the agreement a sharper edge than perhaps the administration has been suggesting in public, but one can see why Obama would do so in the context of the campaign. He may have also concluded that there is no way China would ever sign on, at least initially, so there's no harm in being more explicit about the TPP's goals.

Switching gears, in 2011, China sold less than 9,000 electric or hybrid vehicles. At the time I remarked how this was a horrible record for a country supposedly so intent on promoting green energy. Things have only gotten worse. According to Caixin, in the first 3 quarters of 2012, China has sold only 235 electric cars. That is essentially zero and means there is no support for this sector whatsoever. China reportedly did export 7,500 electric cars. If so, we are seeing the same pattern as in the solar sector: export over 95% of production. This means solar and electric vehicles are part of a global trade strategy but not central to domestic energy or conservation policy.

July 16, 2012

China's Union Pay (银联) finally got busted. The WTO ruled yesterday* that Union Pay has an illegitimate monopoly on electronic payments that must come to an end. The US Trade Representative trumpted the win on its website.

*(well, actually they ruled a few weeks ago but only released their findings yesterday)

This is the second financial services case brought against China -- the first involved financial information -- Xinhua wanted to be the sole distributor of financial information -- and China lost that case, too.

China has one year from today to implement the ruling, and I expect them to do so within that timeframe. Chinese were happy this case was brought against Union Pay, because their monopoly has made the credit card business more expensive for Chinese banks and others. So Mastercard, Visa, and others who pushed the US to bring the case are not the only beneficiaries. The only thing that could lead to a different outcome is if US-China relations go into such a nosedive (over say the South China Sea or another trade dispute) that this case gets tied up in other conflicts. Possible but that hasn't happened to other WTO disputes. China has a clear record of modifying domestic laws and regs to come into compliance when it loses in Geneva. The only exception was the case concerning movie distribution rights, since it related to the regulatory authority of the Party's propaganda bureaucracy. Despite that, a deal in that case was reached to the satisfaction of Hollywood.

From a consumer's perspective, I'm now hopeful that greater competition in China will lead to an elimination of the often imposed 3% fee on using foreign credit cards for local transactions.

July 15, 2012

One would think from visiting bookstores in China that nothing important is occuring in China this year. Of course, later this year the Chinese Communist Party will hold its 18th Party Congress and select a new slate of leaders to take up positions in the Politburo Standing Committe, Politburo, Central Committee, and its top offices, such as the Organization Department, United Front, etc. The same transition occurs first at the provincial level and before that at the county and city levels. The replacement of Party leaders will be followed by replacement of government officials up and down the system. Probably around 20,000 officials will gain and lose posts through this transition.

This is a huge deal, more important than anything else going on in China this year. And it is being absolutely, 100% ignored by Chinese scholars and the media. There is not a single scholar in all of the Chinese mainland who has made a career out of analyzing Chinese elite politics. I've met academics who are quite knowledgeable about the leadership, and if they chose, could write impressive articles. But they write barely anything, at least within publications available in China.

Imagine if in United States the media and scholars didn't pay any attention to American elections and the political class. Of course, that seems like absolute nonsense. There are experts on American elections, the presidency, Congress, and lobbying. Then there are all the news stories, Sunday talk shows, blogging, and twittering, day and night, 365. All absent in China.

Except in Hong Kong. In this little tiny exception of a place, the 18th Party Congress is a huge topic for experts and the media. Go to any Hong Kong bookstore or newspaper stand on the side of the road and you will encounter dozens and dozens of books about China's leadership, their families, and potential developments in policy. In one store, I found a shelf with about 12 books.

It took me a while to sift through these, and I thought I had a good treasure trove. But then I turned around a found a whole other set of shelves, all with books about the leadership. A few steps away even more titles awaited me. If I had wanted, I could have bought 60-70 titles. I must admit that after looking through many of these books, I was not extremely impressed. The books had some basic info about the leaders, and made assertions of about so-and-so being part of Hu's faction and other so-and-so's part of Jiang Zemin's faction, and on and on. And the more I read, the less convinced I became in the accuracy of the claims. But at least there were claims and a discussion.

Back in Beijing? Zilch. I went to one of the city's best bookstores, Wansheng Shuyuan (万圣书院), just outside the south entrance to Tsinghua University. Overall not a bad bookstore, with lots of books on a host of subjects. But nothing on elite Chinese politics save the selected works of various leaders. The bookstore listed its Top Ten Sellers for May, and they were mainly about Chinese history and philosophy, not politics.

The window display of new and suggested titles was equally anodine. Nothing remotely related to the country's politics.

I was curious if I had missed something. So I asked a sales clerk if they had any books on the 18th Party Congress. Her reply, a simple, "no." I asked about books regarding elite politics, and she pointed me to the Politics section of the bookstore. What did I find? A lot of books on Chinese international relations and diplomacy, but nothing on elite politics.

I asked other sales clerks if anyone else had asked for books about the 18th Party Congress, and they answered either, "I don't know," or "it's unclear" (which means, "no, stop bothering me").

In one last attempt, I looked at the magazine rack to see what I could find. Again, nada. One magazine had what could only be described as an extremely boring story on Li Keqiang's recent tour of Europe.

The silence in China is deafening. The contrast with Hong Kong and other places with more open political discussion is stunning. Of course, there are tons of private conversations and gossip-trading going on, but nothing is occuring out in the open.

One is left to ask: Is this a healthy state of affairs for a political community and a country going not only through a political transition but through rapid economic and social development?

July 14, 2012

Caixin reports that visa applications to the US were up 43% in the 2012 fiscal year. If that's the US government's fiscal year, that means from October 1, 2011 to June 30, 2012. Here's part of their story:

U.S. Processes Over 1 Mln Visa Applications from China

The U.S. State Department said on July 12 that over one million Chinese visa applications had been processed in the 2012 fiscal year, a 43 percent increase from 2011. The increase is the result of measures taken to attract more Chinese visitors, including expanding staff and reducing waiting times at U.S. embassies.

Besides greater efficiency, might this in part also be a result of China's sluggish growth? After the financial crisis, where China did not suffer as much as others and then launched an RMB 4 trillion stimulus, there was a wave of returnees, and I'd expect, a relative decrease in visa applications to go abroad, including to the US.

This is just total conjecture. I'd welcome info from someone more informed.

June 05, 2012

In January 1992, Deng Xiaoping famously set out on his Southern Tour with the aim of kick-starting economic reforms, which had languished over the previous 3 years. His trip included a visit to the electronics maker Xianke, whose manager was the son of one of Deng's fighting comrades in the 1930's in Jiangxi province. A decade later, despite the best of connections, Xianke went down in flames. Neither Deng nor any of the other top leaders who paid homage to Xianke could force Chinese consumers to buy Xianke's stereos or DVD players.

My trips to Guangdong have never been so consequential. The first visit was in early 1988, when I arrived by overnight boat. I started in Guilin on a rickity bus that went up and down over horribly scary roads (I occasionally read about them going over cliffs with 20 passengers on board), and then took at boat from Wuzhou down the Pearl River to Guangzhou. I had a small open birth with many people on both sides of me. There were photos near a door showing the results of what happens when you smoke or light a fire on board. Grusome! When I arrived the following morning, I found Guangzhou difficult to navigate compared to Beijing because its roads were not straight and no one spoke Mandarin. I stayed at a nondescript hostel not far from the US consulate and the Swan Hotel. I had three-cat soup and some snake at a restaurant written up in the Lonely Planet guide. When I visited the restroom, I walked by cages stacked to the ceiling of meowing meals.

24 years after my first trip and two decades after Deng's trip to Guangdong, I decided to make my own treck south in late May to see how things were going. Deng and Xianke are now both long gone, and I didn't bother to look for the snake restaurant. My main goal was to take stock of economic reforms and how well Guangdong's leader, Wang Yang, is making out.

My efforts were helped tremendously by Sun Yat-sen University's Edward Wang, who introduced me to many of his friends (including some folks who visited IU before) and helped arrange some excellent interviews.

School of Asia-Pacific Studies, SYSU

Sun Yat-sen University has a gorgeous campus. Its northern border sits along the Pearl River. The buildings are not overly large (like some on the campus of Renmin University in Beijing), and there are trees and quiet paths everywhere.

School of Management, SYSU

What did I find out about Guangdong and Wang Yang? In short, I was pretty impressed by both. Guangdong's economy grew rapidly in the 1990's and 2000's as the core of China's export machine, but as production costs there have risen and global markets have shrunk, everyone knows Guangdong needs to move up the value-added chain and focus more on serving domestic demand. Wang Yang has been forcefully pushing this transition. He's run into some serious opposition from manufacturers who just want to squeeze more and more out of their workforce, but he's also managed to induce some companies to move to northern Guangdong or other provinces and push firms that remain in the Pearl River Delta to upgrade. I'm currently searching for confirming stats, but this is my general impression.

Guangdong has also been relatively proactive on the political front as well, encouraging governance that gives a greater voice to the grassroots, such as through NGO's and village elections. Guangdong is also experimenting with open budgeting so that citizens can have a better (though not perfect) understanding of where their taxes go. On all scores, Guangdong looks very different from the recent approach of Chongqing. And we know what happened there.

One of the highlights of my time in Guangzhou was a visit to a provincial advisory body known as the Canshishi (参事室). This official advisory body is composed of scholars and experts who serve at the pleasure of the Party Secretary and governor, giving their frank opinions about all sorts of policies. I was only marginally aware of these advisory bodies before, which serve the leadership of every province and the central government's State Council. I think they deserve much more attention.

Outside the Guangdong Provincial Canshishi, Guangzhou

During the visit I was able to meet the office director, Mr. Zhou, and received a briefing about the office's history and the evolution of their responsibilties.

From left to right: Mo Xianchun (advisory group's staffer), Wang Xinsheng (Deputy Dean, SYSU School of Asia-Pacific Studies), Zhou Yi (director of the advisory group office), and Edward Wang (SYSU professor and a great guy)

After having my most productive visit ever to Guangzhou, I made the short trip by train to Hong Kong and tried to measure the temperature from the other end of the Pearl River. My first visit to Hong Kong (in 1991) was worse than my first to Guangzhou. It involved a very heated argument with a sales clerk on Nathan Road; I ended up with a bloody lip soothed only by some ice from a nearby McDonald's and then a few hours of rest on the beaches near Stanley. Don't ask my what I said to provoke the clerk's ire!

Downtown Hong Kong (no one dares to jaywalk)

Nothing like that happened on this visit. I had a good time bunking in with a buddy who just moved down from Beijing, and over the course of a few days meeting with analysts of all sorts and shapes. Your average person on the street may not be paying much attention to Beijing, but Hong Kong's newspapers and analyst class are going gangbusters trying to determine which direction China and its leadership are headed in. Needless to say, there's a wide array of views about Guangdong and the future of China's economy and politics. I visited a bookstore and was overwhelmed by the number of books and sensationalistic titles and covers. Digesting that stuff could take months, and it'd leave you with serious stomach pains.

Book covers at a Hong Kong boostore

Having finished my interviews, I went over and took the Star Ferry from Central to Kowloon and enjoyed the views. There's nothing like quietly drifting across the harbour while at the same time gazing at Hong Kong island's towering buildings on one side, the bustling streets of Kowloon on the other, and tug boats and steamers passing through the middle.

May 19, 2012

The Chinese University of Political Science and Law (政法大学) celebrated its 60th birthday last week. I was fortunate enough to attend the opening ceremony. Although it was a real hike to get out to the campus, which is around 20 km to the north of the downtown Beijing -- it took over an hour in snarled traffic -- it was worth it.

It was an amazing performance. I always underestimate how fancy things like this will be. I did wear a suit, which was smart. But while I was in green, everyone else had dark blue suits. I arrived thinking this would be an event for a couple hundred people, but we went into a big theatre, and I guess there were at least 800 people packed in there. And the stage was decked out like the annual meeting of the National People's Congress, with the most important speakers and guests up there looking very important and sipping from their nice tea cups. They were surrounded by lights, a TV crew, a host with a well groomed voice, and dainty young Chinese girls in uniform keeping tea cups full and escorting speakers from their chairs to the microphone.

Down in the audience, I was led to the "foreign guests" section, and I felt like a prop in a play -- the happy foreigners giving greater legitimacy to the accomplishments of the university, but kept apart from everyone else because we were not Chinese. If they really wanted to show they have an international university, we would have been encouraged to mix and mingle amongst everyone else.

I looked at the program, and there were 13 speeches listed. The current president's took over 20 minutes, and I thought we'd never finish. Luckily, speeches are arranged in order of length, with the longest first and the shorter ones following. Speakers did a great job of staying within their appointed times, all well practiced at turning their thoughts into one hour or one minute. One of the funnest parts of Chinese major public speeches are the cues to let you know they are making a big point and want applause. This happens at the end of sentences such as, "To all our guests, classmates, teachers, let's give them a greAT WARM WELCOOMMEE!!!!!" By the time they say "welcome" (huanying, 欢迎), they are almost yelling. Learning how to speak like this is something foreigners have not mastered, but I plan to find some chances to try out my "speechified" Chinese.

The electronics were cool. They had 2 large screens on either side of the stage that switched between the audience and the speaker. I was worried when cameras pointed at me because I was in green and a little tired. I didn't want everyone looking at me with my eyes momentarily closed or me taking a deep yawn. The host began by reading letters of congratulations to the university, and I was impressed by one from Zhou Yongkang. Not that Zhou's letter was any better than Li Tieying's, but from what I've read in the foreign media, Zhou seems to have recently taken a vacation from his official duties. To dispell this, Zhou is going to need to show up at a meeting or visit some sick people in a hospital or something.

One of the nice moments of the program came when about 10 students from CUPL's first class (actually, it wasn't called CUPL until the 1980's), in 1952, came up on stage and each received a plaque. They were, of course, quite old and moved slowly, but they walked with a great deal of pride and smiled widely out at all of us. It was actually moving.

The speeches mostly made the same points, and everyone got plenty of applause. CUPL has made a huge contribution toward building rule of law in society and government, and there is still much more work to be done. But two speakers got more applause than anyone else: Cheng Siwei, a member of the standing committee of the National People's Congress, and Jiang Ping, CUPL's president during the late 1980's. Both had nice things to say about CUPL, but they took decidedly negative swipes at the overall progress toward rule of law and education. Jiang said China needs to have genuinely indpendent universities with genuine academic freedom, else innovation and rule of law will never materialize.

I was impressed that they were invited to speak, and that they said things that reflect relatively negatively on China's educational and political systems. And no one stuffed a sock in their mouth. As I said, the crowd gave them the largest applause, and they didn't even raise their voices as well as others. I didn'y see the TV news that evening, and so don't know if their comments made it beyond the room.

When the festivities ended just after 11:00 am, I made a beeline for the exits and the campus's main gate. CUPL was nice enough to assign a student volunteer to help me the whole way. She escorted me in, and she escorted me out, and then she made a call and a car showed up to take me all the way back into the city to my next appointment. How cool! As I waited a minute for my car, about 100 black Audis with licenses plates of all sorts, including from the miltary, zoomed by me out the campus gates and on to their next destination.

April 26, 2012

Trying to determine the trajectory of economic policy in China is never easy, but last week we got some important insights into the financial bureaucracy's views when PBOC deputy governor and SAFE administrator Yi Gang spoke on April 18th at Indiana University's Indianapolis campus. Yi, a former economics professor at the awkwardly named Indiana University Purdue University Indianapolis, or IUPUI, was in town to receive an honorary doctorate of letters for his academic research and application of this knowledge through his contributions to Chinese economic policy during the past 15 years. Yi joined the PBOC in 1997, and has steadily risen up the ranks, becoming deputy governor in 2008 and SAFE administrator in 2009. In a very nice (and brief) ceremony, President Michael McRobbie ticked off Yi's accomplishments and then bestowed the honorary doctoral hood over Yi Gang's shoulders.

Yi Gang was visibly moved by the ceremony. It was clear he has a special place in his heart for IUPUI and Indianapolis, a city he called a second home to him and his family. He obviously really liked being a scholar, and like most academics, is not extremely comfortable being in the public eye.

It was fitting that Yi Gang then delivered a highly academic 40-minute lecture, "China's Economy -- Path of RMB Exchange Rate Converging to Equilibrium," followed by 10 minutes of Q&A. I'm not sure that everyone in the audience and the members of the Board of Trustees on the stage sitting behind him could follow the details of his graphs and, conversely, that experts on China's economy would find much new. However, I found his presentation and the discussion quite refreshing and insightful.

I haven't seen any media reports other than IU's own press release before the event occurred, but this was a public lecture presented to an audience of about 200 people, and so I'm sure it would not be seen as confidential. Hence, I feel comfortable summarizing his main points.

China has depended heavily on exports for growth, but that era is ending. With substantial RMB appreciation and wages growing faster than productivity growth, China's terms of trade are systematically worsening, which will hamper Chinese competitiveness. Hence, growth must come from other sources.

China's substantial increase in real estate prices does not represent a bubble waiting to pop. There may be a market correction, but he thinks an underappreciated reason for extended increase in prices is the strenghtening of property rights since housing reform in the late 1990's.

The official 2012 target for growth is 7.5%, but growth will likely be just over 8%. He expects inflation to come in around 3%.

China's trade surplus with the US is entirely based on processing trade, which is less sensitive to exchange rate flucutations. For trade in final goods, China actually runs a deficit with the US. He argued that if the US would have reduced barriers to exports of high-tech goods and kept the same market share it had in 2000, US exports would have grown by an additional $250 billion since then. (Of all the things he said, this was the least persuasive, as it assumes a highly unrealistic linear extrapolation. This is just an official talking point that others shouldn't take very seriously.)

To help re-balance China's economy, key policy reforms include: 1. Increasing domestic demand; 2. Improving the social safety net; 3. Increasing environmental protection; 4. Reducing price distortions in oil, other energy products, and transportation (this means raising these prices); 5. Expanding Chinese outward direct investment; 6. Making the RMB exchange rate more flexible, which received a boost a few days before when the daily trading band was widened; and 7. Expand imports.

Given the Euro sovereign debt crisis and the uncertainty surrounding US deficit reduction plans, it would not make sense for China to accumulate additional foreign exchange reserves. This does not mean, however, that China wants to reduce forex holdings.

Interest rate reform is important, but forex reform and achieving capital account covertibility are higher priorities. These 3 reforms need to coordinated and sequenced correctly. Interest rate reform seems less pressing because: 1) Chinese interest rates are much lower than rates abroad, and reforming interest rates would mean raising them, inducing more capital inflows (hot money) into China, which the PBOC would like to avoid; and 2) Since inflation has come down, Chinese real interest rates are no longer negative as they were a few years ago.

What's this all mean? A couple things. First, this sounds like a roadmap for reform, and is consistent with the report, "China 2030," published in February by the World Bank and the State Council's Development Reform Center. How quickly China will move down this road or whether it will take another path is unclear, but at least we have a pretty good sense of the outlines of what we could potentially expect.

Second, I'm told by someone who closely follows the comments of China's financial bureaucracy that almost everything Yi Gang said in Indianapolis has already been said by others. The only thing that stood out is his last comment about the appropriate sequencing of reforms -- liberalizing the RMB exchange rate and opening the capital account before engaging in further interest rate liberalization. To be fair, that comment was made during the Q&A period and wasn't part of his prepared remarks. My source says Yi Gang's explanation isn't entirely persuasive. Since the RMB is not likely to appreciate much soon, raising interest rates -- the likely outcome of their liberalization -- isn't likely to spark a hot-money inflow. The more likely reason to not reform interest rates is to keep the cost of borrowing as low as possible for favored borrowers, that is, for state-owned enterprises. The implication is that if Yi Gang presented us with a roadmap for reform, it is a road that won't be traveled in a day, but, in fact, will take much longer.

April 10, 2012

Last month I picked up a copy of Newsweek just before boarding a plane in Beijing for the US. The issue focused on women across the globe. Inside was an interesting table placing American women in comparative context. A thick black line was placed through the word "country" at the top of the second column. Given that Taiwan is mentioned in table -- not once but twice -- I can understand how this kind of thing might be insulting to Mainland readers. However, I can't think of a good substitute word to put in that location. "Region," "authority," "island," "location," etc, don't fit there.

There may be another explanation. Not nationalism, but prudishness. Perhaps censors were upset that Taiwanese women apparently have the world's highest ownership rate for vibrators, and discussion of such things shouldn't be so public. Or was it both?

March 30, 2012

Yesterday the National Development and Reform Commission announced that foreign banks would be allowed to bring in $24 billion in borrowed funds into China in 2012. This helps address a potential short-run problem of concerns about capital outflows, but it is part of a much larger trend of substantial financial reforms visible over the past 5 months. In the Fall, the top leadership of the China's securities, banking, and insurance regulators were changed. The most important personnel switch was to replace CSRC commisioner Shang Fulin with Guo Shuqing. Shang was moved over to head the banking regulatory commission, replacing retiring Liu Mingkang. Zhou Xiaochuan, who will likely conclude his tenure as Governor of the People's Bank of China next March, has also continued to sound reformist.

Since last Fall, a long list of financial reforms have been issued; each is individually minor, but together they are pretty substantial.

Allowing further experiments with issuance of municipal government bonds.

Permit greater private lending to small- and medium-sized enterprises in Wenzhou, as well as make it easier for Wenzhou businesses to invest overseas.

Further gradual appreciation of the Renminbi.

Drop by drop, the growing list of individual financial reforms has gotten folks thinking that even bigger and more important reforms are on the horizon, namely a liberalization of interest rates and a more complete opening of the capital account. Authorities are at once discussing these possible measures and tamping down expectations.In the past, announcements of major financial reforms have always been sudden, for example, with the scrapping of Foreign Exchange Certificates in 1994 and unpegging the Renminbi from the dollar in 2005.

Nick Lardy, in his new book, Sustaining China's Economic Growth after the Global Financial Crisis, argues that interest rate liberalization is the cornerstone of any serious economic reform plan going forward. Determining when interest rates will be reformed involves a lot of guess work. Reforms would force the gap between deposit and loan rates to narrow, putting pressure on banks. Also, the country's overall debt levels are still high, and interest rate reform could add to the debt obligations of banks. However, Chinese banks currently are enjoying record profits and perhaps could endure the shift to more liberalized interest-rate environment.

The spate of financial reforms also is pushing people to wonder whether we are on the eve of broader economic and political reforms. Usually, such reforms do not come at the end of a Central Committee's term, particularly when many of the members of the Politburo will be replaced. In the past new leaders have taken 1-2 years to get settled before implementing substantial changes. But there are already signs that a list of reforms is being contemplated, including: greater support for the private sector and reduction of state-owned enterprises' administrative monopolies, greater autonomy for business associations, hukou reform, liberalization of the education system, and government restructuring.

Are we on the precipice of major reforms or will the tinkering of the last few months lead to...more tinkering? At this point, it is still anyone's guess.

March 29, 2012

On March 23-24, 2012, Indiana University's Research Center for Chinese Politics & Business (RCCPB) and the Workshop for Political Theory and Policy Analysis jointly hosted the "Conference on China and Global Governance" in Bloomington, Indiana. Scholars from the US, Canada, China, and Europe presented findings from research projects examining the growing role of the Chinese government and non-state actors in international regimes dealing with foreign investment, exchange rates, intellectual property rights, foreign aid, public health, and climate change.

Some conclusions that emerged out of the papers and discussion are surprising:

• China by and large is a "status quo power." This finding goes against the expectations of those who believe that a rising China that did not create the current rules of the international system would naturally be an opponent of the status quo. That has not been the case. Although there is disagreement about what constitutes "status quo" vs. "anti-status quo," in no area that we examined did we find the Chinese government, industry, NGO's, or experts going strongly against the grain of existing international rules and procedures. For the most part, Chinese are attempting to learn the existing rules of the game and not promote alternate institutions and norms.

In 2009, Zhou Xiaochuan, the governor of China's central bank, put forward the idea of creating a "super-sovereign currency," but in reality China still favors a dollar-based international monetary system. A substantial part of China's foreign aid is "tied" to economic benefits for Chinese industry, but foreign aid even from many OECD countries has been similarly tied. China's rules for reviewing foreign investment for national security and competition policy concerns are relatively similar to those of other countries. China is a huge violator of IP, but its legal system and the trend of growing patenting amongst Chinese companies places China increasingly within global common practices.

Bruce Reynolds (University of Virginia)

• China's domestic political economy fundamentally shapes how Chinese participate in the international community. Chinese are prone to gravitate making international regimes serve the interest of industry and production, as opposed to the interests of consumers and workers; and they generally prefer state-based institutions, as opposed to private governance mechanisms.

Zhang Lu (Temple University), left, and Xu Jiajun (Oxford University)

• The global status-quo shouldn't be seen as inherently good, and in fact, in many areas is quite troubling, as overall poverty levels and inequality are still on the rise. The global IP regime, to many, has overly shifted its balance toward protecting inventors at the expense of consumers. China and others need to be much stronger advocates of reform; otherwise, poverty, climate change, and other problems will not be solved.

Workshop co-founder Lin Ostrom, winner of the 2009 Nobel Prize in Economic Sciences, gave the conference's keynote address. She discussed how to apply polycentric governance approaches, a key prinicple the Workshop has long advocated, to effectively addressing the problems of global climate change. Her advice: don't just depend on national governments and international negotiations; local initiatives can also be extremely important. She noted a program in Sacramento where when customers were given electric bills that showed how much electricity they used relative to their neighbors ("You're using much more than your neighbors!"), people quickly cut back.

This research on global governance is currently being issued through the center's working paper series. Contributions will soon be revised and published through an edited volume, journal articles, and other formats.

February 14, 2012

In January The Economist had two issues focused heavily on the rise of state capitalism, one on January 21, the other on January 28. China featured prominently in both. Now that the world can't be divided into capitalist and communist anymore, The Economist has re-divided the world into genuinely free market economies and those where governments heavily intervene in the economy, either through direct ownership or industrial policies. Clearly governments take on different roles in different countries, and the Chinese state both has a large stake in the economy and intervenes heavily at the sector and firm levels. And yes, China's market economy is far from free, and I don't think it will fundamentally change from its current form for a long time. The "transition" has essentially ended.

However, it's facile to divide the world into free-market capitalism and state capitalism. Just about every government does more than the Libertarian call to provide basic public goods and then get out of the way. The US government provides a lot of regulation to make markets work and protect private property rights, but it's far from a neutral observer with no desire about who wins and who loses.

The best retort I've seen so far to the "state capitalism" discussion is provided by Niall Ferguson. In his recent Foreign Policy article, "We're All State Capitalists Now," he provides data showing that countries do not neatly divide into two broad camps, and that on most measures, such as government spending as a % of GDP, China falls largely within the normal range with many others.

An interesting nugget that Ferguson cites shows that in cross-national reputation surveys, China fairs better than the US on two scores: politicians' ethics (China ranked 26th to the US's 50th) and political favoritism (38th to 50th). Given the perception that China is highly corrupt, this is quite odd; but it shows Americans' own estimation of their system differs from that held by others.

The ongoing debate is an extension of the "varieties of capitalism" discussion carried on by political economy specialists over the last few decades. In that debate, scholars offered a variety of potential labels: liberal capitalism vs. coordinated capitalism, the free-market state vs. the developmental state, etc. None ever stuck. State capitalism seems more appealing and easier to remember, but I for one hope this year's fad soon fades.

February 02, 2012

Facebook may raise $5 billion in its IPO, and the company may reach an estimated value of $75 billion. Today I read that People's Daily Online has recently filed for an IPO in Shanghai. Their IPO looks a little different. They only plan to raise about RMB 560 million (~$87 million), and their IPO will only be available to Chinese domestic investors, save those few qualified foreign institutional investors who have received special permission to play in China's financial sandbox.

One neat thing Caixin notes in its report, People's Daily Online gets more than 20% of its income through government contracts. Given that this is the flagship publication of the Chinese Communist Party Central Committee, one might expect that Party involvement in the organization goes beyond such contracts.

We've all heard of Mark Zuckerberg. Good looking dude, had a flick made about him, has a huge effect on the planet's social landscape.

Have you heard of Liu Yunshan, Director of the CCP's Propaganda Department? He may be good at overseeing the publicity machine of the Party, but he ain't no Mark Zuckerberg.

How does the publicity machine of the party prosper or even maintain its relevance in this day and age?

In 5 years, which stock do you think will have increased in value more?

January 22, 2012

Here is a terrific story from the New York Times on the globalization of Apple. The company has moved jobs around the world to both save on costs and to take advantage of the more flexible and better quality manufacturing facilities and talent that are in Asia.

The reporters present a very balanced story; this is not just about a greedy company willing to exploit powerless workers to get rich. It has been forced to diversify production to become more efficient and produce better products. Some contracted workers in Asia work 12-hour shifts and 6 days per week. When an employee in northern California was asked if he would do the same, he said he wanted his Saturdays free so he could watch his kids play soccer.

I saw one big thing missing from the piece. Although from an employment perspective Asia and China have benefitted imensely from globalization of the consumer electronics supply chain, China participates at the lowest value-added segments of the production of the iPhone. Most of the value-added comes from the US, and most of the profits go to Apple, not suppliers. China is having an extremely difficult time moving up the value-added chain; the story highlights China's ability to provide a flexible workforce and modify manufacturing on a dime; but Chinese firms contribute little to the design of the iPhone or other popular consumer electronics.

The difficulty of being more innovative is a central concern across China. Following the death of Jobs, there was a big conversation on blogs here, "Why does China not have a Steve Jobs?" So far, the main solutions have been to crank out a lot of engineers and scientists, throw a lot of money at R&D, ramp up establishing patents and standards, and provide protection for domestic firms against foreign rivals. Still missing is encouraging creativity in the educational system, opening up the media and flow of information, more seriously protecting IPR for innovators, and making capital more accessible to private business. My guess is that there are lots of innovative people in China, they just live in a non-supportive environment.

Hence, for the time being, China is mainly benefitting on the employment side of hi-tech; if it ever manages to move on reforms that would promote product-level innovation, then China would be in the driver's seat globally. So it seems as if the US and China are mirror opposites. China needs the US's innovative environment, and the US needs a deeper sci-tech workforce and better infrastructure to support manufacturing. Not surprising their economies are so intertwined.

Full disclosure: I'm an iPhone 3Gs owner and just switched from a Dell to MacBook Pro laptop. I love both, but I hope Apple will make Word work better on my Mac; it has been far from a seemless transition, which is the fault of Apple and Microsoft. Also, why on earth can't I easily delete text in front of the cursor (and not just back-up)? I can do so in email and on the web using Ctrl-D, but that does not work in Word; and really, I should just have to hit one key for this, not two. I suppose these are minor complaints, but Apple should be all about the user experience.

January 18, 2012

I don't know how they did it -- who they lobbied or who they threatened to make fun of -- but China's cartoonists have been awarded a huge tax break. According to a story on IFeng, the income taxes for cartoon animationists have been dropped to just 3%. This seems like better tax treatment than the hi-tech seven "strategic emerging industries" -- environmental protection, info tech, biotech, new energy, new materials, new energy vehicles, and advanced equipment manufacturing. Finally, industrial policy directed where funds are needed most.

January 14, 2012

In 2009, China identified new-energy vehicles as one of seven "strategic emerging industries" (战略性新兴产业). At the time, there was a lot of excitement, as BYD was seen as a rising star. The Shenzhen-based private car maker was seen as having an excellent chance to turn its original strength in batteries into a successful electric car manufacturer. Warren Buffet invested a ton of dollars into BYD.

The results so far? The China Association of Automobile Manufacturers just released its 2011 figures. Total auto sales in China in 2011 reached 18.5 million units, up 5% over 2010. That's impressive for a country where a decade ago most people still rode their bicycles to work. But the story isn't pretty for new-energy vehicles. There were only 5,579 cars bought in China last year; hybrids faired even worse, with only 2,580 units driven away by Chinese consumers. That means new-energy vehicles accounted for 0.04% of total auto sales in China in 2011.

I guess that means there is a lot of room for growth in the industry. What will it take for the sector to take off? For one, the cost of new-energy vehicles has to come down a lot, and so far, existing subsidies for consumers aren't sufficient to make these vehicles compeititive. More importantly, there needs to be an infrastructure put in place for charging vehicles, and it needs to extend broadly across cities and regions. Drivers are not going to buy vehicles that they can only charge at home; most Chinese live in apartments, and it's not easy to find a place to plug in on the street.

How likely is either? Not likely soon. A back-of-the-envelope calucation suggests it would take subsidies of RMB 55.5 billion to make new-energy vehicles competitive enough so that they would account for 5% of vehicle sales in a single year. (That assumes a conservative 33% premium for electric or hybrid vehicles.) Building electric charging stations would be even more expensive. Much of the cost of both would have to be borne by the central and local governments, and considering the current economic climate, with slower growth and substantial debt, it's unlikely government budgets will put up these kinds of funds any time soon.

Lovers of conventional cars can rest easy. The rest of us can continue to enjoy polluted air and growing traffic jams. The better option: ride the subway!

December 23, 2011

It's conventional wisdom that China is just the factory floor of the world, and that its companies operate in obscurity making, or rather, assembling stuff for their American, European and Japanese counterparts. That's still partly true, but in 2011 Chinese brands gained some traction. According to a recent article in Advertising Age, 83% of people outside China still cannot name a Chinese brand (if they can, they cite Lenovo or Tsingtao), but that hasn't stopped Chinese companies from becoming much more popular at home. The value of Chinese brand names is going up across a wide variety of sectors, including mobile phones, clothing, food, the Internet, airlines, insurance, and autos. In a variety of industries, the popular view of Chinese brands is surpassing that of their foreign counterparts.

If one just looks at corporate behavior, you might conclude that this is simply the product of business competition, and naturally Chinese companies ought to be gaining in popularity. While definitely part of the story, it is also true that foreign firms face a variety of market access obstacles and that these regulatory barriers are providing space for local companies to move ahead. Would Baidu be so popular if Google wasn't so harrassed it had to move its search enginge portal to Hong Kong? If Singapore Airlines could fly between Shanghai and Guangzhou, don't you think that would bite into the market share and image of China Eastern Airlines as consumers could directly compare service? (Speaking of which, I'd love it if Singapore Air flew Indianapolis to DC.) Would ICBC be seen as a strong bank if it UBS, HSBC, and Citibank could really compete on a level playing field for domestic customers' RMB deposits and loans?

Of course, not. If so, shouldn't Chinese consumers be upset, not to mention the foreign companies? Well, I suppose so, at least in the short run. But if we look at things over time, if Chinese companies use this opportunity to actually improve the quality of their products and services, and not just get fat from eating from the hands of the Chinese government, then the sacrifice of Chinese consumers may be temporary and worth it. The trick is to provide just enough protection to encourage Chinese brandnames to develop traction, but not so much cover that local companies feel no need to genuinely improve. Most economists and foreign industry would argue that this balance is so hard to achieve that policymakers ought to err on the side of more openness. I'm really not so sure.

Rather than brand rankings, I'd like to see more cross-national polling on company service, since I think that good customer service is the best proof of who company executives think are king -- customers or government officials. With no knowledge of this data, which I'm sure exists, my sense, based solely on my own personal experience, is that service among Chinese companies is gradually improving. My restaurant experience in China has gone up a kajillion percent over the last decade. It's probably no coincidence that the restaurant sector is relatively open, with tons of privately owned restaurants as well as a variety of foreign brands, not to mention the push given by the food service in 4- and 5-star foreign hotels, such as the Shangri-La and Westin.

Where's the truth in all this? Data. Let's go back a decade, and then wait another five years, and we'll be able to even better analyze the trends and what factors -- competition, protection, etc. -- shape them.

So when looking for that last present to place under the Christmas tree, perhaps you ought to consider something with a Chinese label.

December 20, 2011

The International Centre for Trade and Sustainable Development (ICTSD), based in Geneva, just issued a very good report on the policy implications of the first decade of China's membership in the World Trade Organization.